Inflation Falls Below 3.5%: Will RBI Cut Again?

India’s Inflation Cools Off: Is a Rate Cut Wave Coming?

India's latest inflation data just gave the Reserve Bank of India (RBI) some breathing room and possibly borrowers a reason to smile.

Retail inflation, or the Consumer Price Index (CPI), dipped to 3.34% in March 2025, marking its lowest level in over five years. This drop follows February’s already-soft 3.61% print, placing it below the RBI’s medium-term target of 4% for the second month in a row.

That matters a lot for the economy. Why? Because interest rates are the RBI’s primary tool to manage inflation. With prices now cooling steadily, the central bank is shifting gears from controlling inflation to supporting growth.

What’s Driving This Cooling Trend?

Much of this relief comes from lower food inflation, now at 2.69% down sharply from 3.75% in February. Cheaper vegetables, pulses, and eggs are helping households feel some relief. A favorable “base effect” also helped, as March 2024 saw unusually high prices, making this year’s numbers look better in comparison.

To visualize this shift, CRISIL’s Thali Index—which tracks the price of a typical home-cooked Indian meal, shows a 3% fall in vegetarian meal costs, while non-veg meals remained steady.

But don’t pop the bubbly yet.

Core Inflation Still Sticky

Core inflation, which excludes food and fuel, remains a concern at 4.1%. Rising prices in areas like personal care (up a sharp 13.5%), transportation, and education show that inflation hasn’t disappeared, it’s just changing form.

Key culprits? Soaring gold and silver prices, costly edible oils (+17%), and pricey fruits (+16.2%). These are being affected by global supply fluctuations and a somewhat weaker rupee, which raises import costs.

To top it off, an 8% hike in LPG prices this April could nudge inflation slightly higher again, by around 0.1%, say analysts.

RBI Responds with a Rate Cut

Given the cooling inflation, the RBI’s Monetary Policy Committee (MPC) cut the repo rate by 25 basis points to 6% in April. This marks a dovish shift after years of rate hikes or cautious pauses.

What’s behind this move?

• Inflation is below RBI's Q4 forecast
• FY25 inflation averaged just 4.6%, down from FY24’s 5.4%
• FY26 inflation is projected at 4.3%, per Crisil.

This gives the RBI more flexibility to boost economic activity, especially as credit growth slows across the banking sector.

Good News for Borrowers, Not So Much for Savers

For borrowers, this is great. Lower interest rates mean cheaper home, auto, and business loans. Expect a pickup in loan demand if banks follow suit and cut lending rates.

However, for savers especially retirees relying on fixed deposits (FDs), this is a challenge. Banks are already trimming FD rates to protect margins. If the repo rate falls further, real returns on deposits could turn negative in a high-tax environment.

Inflation Outlook: Still Some Risks

While the overall picture looks optimistic, regional disparities remain:

• Kerala: 6.6% inflation
• Maharashtra & Tamil Nadu: Above 3.3%
• Delhi & Telangana: Ultra-low at 1.5% and 1.1%

This suggests that while national CPI is falling, pockets of inflationary pressure remain. The RBI can’t ignore this.

Plus, global factors like oil price shocks, geopolitical risks, and commodity volatility could derail the low-inflation trend. The central bank will likely stay flexible, adapting its policy as needed.

What Lies Ahead?

The RBI’s path forward will likely be cautious but supportive of growth. With the Indian Meteorological Department forecasting an above-normal monsoon, food prices may remain in check, giving the MPC further reason to keep rates low.

But don’t expect a rapid series of cuts. The RBI will want to ensure core inflation stays contained and global uncertainties don’t reverse progress.

Also on the radar: wholesale inflation, which came in at a modest 2.1% in March, reinforcing the disinflationary narrative.

Final Thoughts

India’s March inflation numbers are more than just a feel-good headline—they signal a shift in how the RBI may steer the economy. With CPI well below 4%, the central bank has the space to boost growth without sparking price instability.

But caution remains the keyword. If core inflation resurfaces or external shocks arise, the RBI will likely pivot back to a more neutral stance.

For now, borrowers can enjoy some rate relief. Savers, however, may need to rethink their fixed-income strategies.

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